Vaccine Therapies Hold Promise for Investors: Stephen Dunn

Source: George S. Mack of The Life Sciences Report (4/12/12)

Developing vaccines to treat and/or prevent disease promises life-changing benefits for patients and unique opportunities for investors. In this interview with The Life Sciences Report, LifeTech Capital Senior Managing Director and President Stephen Dunn discusses the roadblocks encountered by some developers of immune therapies and how other companies are working around those obstacles, producing investment opportunities in the process.

The Life Sciences Report: I’d like to talk about preventive and therapeutic immunization. How large is the preventive vaccine market?

Stephen Dunn: According to the World Health Organization, over 12 million (M) people are reported to die from infectious diseases annually, with the unreported figures much higher. In addition, the number of people afflicted with nonfatal infectious diseases is likely near 1 billion (B), which also represents significant global healthcare and economic costs. While difficult to calculate precisely in dollar terms, the global vaccine market is roughly $30B or more, with the U.S. representing $20B or more. We expect this to grow significantly as there are over 300 infectious diseases and only about 15% of them have an effective prophylactic therapy.

TLSR: We know that governments have to be involved in preventive vaccines. Foundations, such as BIO Ventures for Global Health, the Bill and Melinda Gates Foundation, Wellcome Trust, etc., are also involved. Development costs may be subsidized, but margins will be thin for sure. What's the bottom line? How thin will margins be, and can prophylactic vaccines be profitable to companies and their shareholders?

SD: We expect margins on the basic routine immunizations with low incidence to be around 5%, which investors should treat more like an annuity than a growth vehicle. However, vaccines in new indications, especially those in highly contagious or fatal indications, can command significantly higher margins and represent significant investment opportunities. Examples of this are Merck & Co. Inc.'s (MRK:NYSE) Gardasil and GlaxoSmithKline's (NYSE:GSK) Cervarix, prophylactic vaccines for human papillomavirus (HPV), which causes cervical cancer. These have solid profit margins.

TLSR: Shifting to therapeutic immunization, one high-profile major development project that has come to fruition is Dendreon Corp.'s (DNDN:NASDAQ) Provenge. Uptake has been disappointing, and the company has had a very rough year. Does this bode poorly for other therapeutic vaccine developers?

SD: Dendreon's Q411 results were $77M in Provenge sales, with a 26% gross margin. While this looks like a high margin compared to prophylactic vaccines, it is not enough for a therapeutic vaccine. The patient volume is much lower, with only 250,000 (250K) prostate cancer patients who can be treated versus many millions of people receiving prophylactic vaccines. Provenge is patient-specific and must be custom manufactured, so the cost of production, requiring multiple production centers, is significant. The limitations are certainly a concern for patient-specific vaccines, but there are alternative vaccine approaches for investors.

TLSR: Will therapeutic vaccines developed in the future be less expensive than Dendreon's, which costs $93K/year to treat a patient?

SD: I think the entire therapeutic vaccine industry has taken notice of Dendreon's struggle to cover its costs of manufacturing a patient-specific therapeutic vaccine. The pricing issue is driven by the drug's modest effect on prostate cancer survival, and the fact that a number of new, competing therapeutic options are half the cost. Overall, pricing is always a function of benefit versus alternative therapies, the same as for any drug.

For example, Bristol-Myers Squibb Co.'s (BMY:NYSE) Yervoy, for melanoma, is an immunotherapy that inhibits CTLA-4, augmenting T-cell activation and proliferation. Because there are very few options for these melanoma patients, the pricing of Yervoy at $30K per dose, or $120K for four cycles, is not out of line. In addition, this is an "off-the-shelf" therapeutic, meaning it does not require custom manufacturing for each patient, and the gross margins are significantly higher.

TLSR: Is Provenge the classic first-generation prototype, leading the way while those that follow benefit by being able to produce a product that is cheaper and better?

SD: Provenge is a classic first-generation example of a patient-specific vaccine, and illustrates the high manufacturing costs of that approach. One company addressing the manufacturing issue is ImmunoCellular Therapeutics Ltd. (IMUC:OTCBB), which is developing a patient-specific cancer therapeutic vaccine called ICT-107. The difference is that it can manufacture around 20 doses at once for the patient, versus Dendreon, which can only produce a single patient-specific dose at a time. This should result in significantly better economics.

Another vaccine approach is being used by Immunovaccine Inc. (IMV:TSX.V). This company combines seven antigens found in breast, ovarian and prostate cancers in a sustained-release formulation, rather than manufacturing patient-specific vaccines.

Other manufacturing processes, such as those used in DNA vaccines, can design and produce "off-the-shelf" vaccines faster. These represent third-generation technologies. While no therapeutic DNA vaccine has yet been approved, both Vical (VICL:NASDAQ) and Inovio Pharmaceuticals Inc. (INO:NASDAQ) currently have therapeutic DNA vaccines in various cancer clinical trials.

TLSR: How much can an adjuvant be worth to companies engaged in immune system modification—either therapeutic or preventive?

SD: Competing immunotherapies tend to converge on the same antigens in a specific indication, so the differentiator may lie with the adjuvant. Some research has shown that adjuvants may even be more important than the antigen, resulting in them being called "immunology's dirty little secret." In fact, some suggest that Dendreon's Provenge results may not have been a result of the prostate antigen but rather the adjuvant, because it used a placebo control arm. An interesting pure-play in this space is Stellar Biotechnologies Inc. (SBOTF:OTCPK; KLH:TSX.V; RBT:Fkft), which is the world leader in keyhole limpet hemocyanin (KLH) production for use as an adjuvant and protein carrier. KLH is currently being used as either an adjuvant or protein carrier in over 20 active human clinical trials in various indications. One might think of Stellar as an "arms-merchant" to immunotherapy developers.

TLSR: Thanks for your time, Stephen.

SD: My pleasure.

LifeTech Capital Senior Managing Director and President Stephen Dunn was previously the managing director of Life Sciences Research at Jesup & Lamont, as well as director of research for Dawson James Securities and director of Life Sciences at Cabot Adams venture capital group. He has held management positions in business development, finance and operations having worked in over 25 countries in North America, Europe and the Far East with biomedical companies including Beckman Coulter, Coulter, Cordis (Johnson & Johnson), Telectronics (St. Jude Medical) as well as several smaller companies. With over 25 years within the global biomedical industry, Dunn has negotiated numerous intellectual property licenses, product development agreements, venture funding, mergers and aquisitons and joint ventures. Dunn is a five-star biotechnology analyst on StarMine and has appeared in both the financial and scientific media such as The Wall Street Journal, Newsweek, Forbes, Nature Biotechnology, The Scientist, CNN, Nightly Business Report, BioWorld and many other media outlets. He is also a frequent speaker and panel member for many financial, medical and venture capital events.

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DISCLOSURE:1) George Mack conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None. 2) Stephen Dunn: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. Stellar Biotechnologies is currently an advisory client of LifeTech Capital. 3) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Stellar Biotechnologies Inc.; ImmunoCellular Therapeutics Ltd. Merck & Co. Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services.